Hold Aarti Industries; target of Rs 968: East India Securities

East India Securities' research report on Aarti Industries

The company had entered into Rs 40 bn sales contract with a global agrochemical player over a period of 10 year for supply of high-value agrochemical intermediary with application into Herbicides. The contract was expected to generate incremental revenues of Rs 4 bn per annum over the next 10 years. This contract was highly margin accretive to the company with nearly 40% EBITDA and 19-20% PAT margins. Sudden termination of contract from the global client comes as a shock to the street because in last conference calls management was confident on commercializing the operations of the said contract by H2FY21. Also, there was no sign from the management regarding any uncertainty of the contract in previous conference calls.

Outlook

We have factored in stated compensation in our projections. As per management, the contract officially terminates in March 2022. Aarti is liable to supply the intermediary to its customer. Therefore, till FY22E Aarti will get the benefit of the contract. We assign a forward PE multiple of 22x (earlier 24x) to its FY22E earnings and arrive at a target price of Rs 968 per share which is an upside of 4.8% from current levels. We assign HOLD rating on the stock.

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